July 20, 2021

Trbo Commercial Real Estate – 2nd Quarter Industrial Market Report Industrial Real Estate – Rally The Valley!


As we closed out the second quarter of 2021, the industrial market continued to lead the league in sales, leasing (and three-pointers!) holding out as the Champion above other market sectors.

Last year marked one of the best seasons on record for the Phoenix industrial market, and if 2021 trends keep apace, the market will likely meet or exceed last year’s slam dunk performance. The Valley’s rapidly growing consumer base and trends accelerated by the pandemic have bolstered the need for industrial space. The shift away from brick-and-mortar retail to online has generated demand for warehouse and distribution facilities, just like the Phoenix Suns shift from chumps to champs has generated a Rally The Valley fan base.

Investors and fans are on fire in Phoenix! Industrial sales volume in the second quarter reached an all-time high.. Institutional and private out-of-state investors have been behind some sizable transactions over the past four quarters that have bolstered sales. Let’s hope the Suns can harness similar momentum straight to the Championship Trophy! But for now, let’s focus on the momentum of Phoenix’s Industrial Market.




Tenants are expanding their footprints in Phoenix at an unprecedented pace following a record year for demand in 2020. In 21Q2, leasing volume climbed to more than 6 million SF, matching 21Q1’s total and outstripping the average quarterly volume of 3.8 million SF since 2006. The increased consumer dependence on online ordering throughout the pandemic has fueled demand for warehouse and distribution space. Amazon alone penned 11 leases from January 2020 through June 2021 and has also completed ground-up construction. Its leases range in size from a massive 1.1 million-SF distribution and fulfillment center to a 100,000-SF last-mile facility. The e-commerce giant planted its largest stake in the

market late last year upon the delivery of its two-story 2.3 million-SF robotics fulfillment facility in Goodyear. Amazon also occupied a 650,000-SF in Goodyear in 21Q2.




Despite substantial new supply, vacancies have held tight, which has supported 36 straight quarters of positive rent growth in the market. Historically, rent growth in Phoenix had lagged the National Index, but after gaining some momentum late last year, rent growth has outpaced the U.S. average. Yet, Phoenix maintains its position as an affordable market. Rents average $9.30/SF, which is below the national average and 30%-40% below asking rents in California markets.

Asking rents vary widely by location in Phoenix. Submarkets in the West Valley have asking rents that are far less expensive than areas in the East Valley and North Phoenix, which is in part due to the large swaths of available and affordable land. Average rents in Tolleson and Goodyear are below $7/SF, while rents are upward of $11/SF in Deer Valley and near $15/SF in Scottsdale.




Construction activity has ramped up in recent quarters, and most of the space is being built without a tenant in place. The rise in speculative construction demonstrates the high level of confidence among developers and lenders that the new product will attract a tenant. Nearly 19.5 million SF of space broke ground in the first half of the year, which is the market’s highest level of construction starts in a six-month span.

About 22.9 million SF is underway. Once that space is completed, the market’s inventory will expand by 6.0%. That share ranks Phoenix second in the nation for construction as a percent of inventory.




Investors are bullish on Phoenix, and the buyer pool is growing as more out-of-state buyers, especially from California, enter the market. In the second quarter, about 25% of the properties that traded sold to California based investors. Local investors are still active, as well, but many are getting squeezed out of larger deals due to an intense bidding environment.

REITs account for a small share of the buyer pool, likely due to Phoenix’s past boom and bust tendencies, but they have been behind some notable deals over the past year. In February, JLL Income Property Trust acquired four industrial buildings that make up the Southeast Phoenix Distribution Center for $91 million from McShane Development. The buildings were constructed in 2019 and are in Chandler near the intersection of Interstate 10 and Loop 202. The properties were 96% occupied at the time of the sale. This investment is JLL Income Property Trust’s second industrial acquisition in the Phoenix market. The buyer purchased the Chandler Distribution Center for $31 million in 2019.




Thanks to the extensive labor pool, businesses are selecting Phoenix to expand their operations. Some employers have announced expansions since the pandemic. Amazon opened 11 last-mile and fulfillment

sites last year throughout the metro and leased a 95,000-SF office in Tempe, which will generate thousands of new jobs. Zoom, the California-based video conferencing company, revealed plans to open a Phoenix research and development center. TSMC made headlines for its commitment to bring more than 1,600 jobs to the state with a $12 billion semiconductor factory. Other companies that have added hundreds of new jobs over the past few years include Allstate, Deloitte, DoorDash, OpenDoor, Silicon Valley Bank, Choice Hotels, Mayo Clinic, Wells Fargo, Farmers Insurance, and USAA. Microsoft, Google, and Apple have also invested in data centers throughout the metro. While labor is the primary driver behind the market’s business attraction success, relative affordability helps tip the scale in favor of Phoenix when companies make their site selection decision.

The number of companies moving to metro Phoenix is noteworthy, but the diversity of industries has helped sustain the region’s long-term stability. More than a decade ago, Phoenix was synonymous with cheap labor and land that attracted call centers and back-office operators. Moreover, the economy depended on industries associated with household growth—construction, lending, brokerage, tile and cabinet manufacturers, etc. Because of its past reliance on housing, Phoenix was among the hardest-hit markets during the Great Recession; the market lost more than 300,000 jobs, 25% of which were in the construction industry alone. Phoenix recovered from the Great Recession about two years after the U.S. The companies that Phoenix is attracting have evolved. The market has emerged as a bustling technology and financial hub. This diversification of industry is what has helped Phoenix perform best among its peers.

If you have questions about the industrial market or the local economy, please feel free to contact me.


Source: CoStar

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About Craig
Craig Trbovich is a commercial real estate broker with Commercial Properties, Inc. in Scottsdale, Arizona, specializing commercial sales and landlord representation in the Phoenix Metro Area. He applies 35 years of experience as a CPA and an investor to help other owners and investors maximize their returns, bringing a strong financial and tax perspective to all aspects of commercial real estate ownership. His strengths include sales and leasing, as well as an in-depth knowledge of the development community and the local market.